With shares up 1,425% over the last five years, Nvidia (NVDA -0.62%) is the quintessential artificial intelligence (AI) stock, designing the chips other enterprises use to run and train consumer-facing algorithms. However, the company's dominant role has attracted political attention as the technological rivalry between the U.S. and China heats up.

Let's discuss how this and other challenges could impact Nvidia's stock price over the next half decade and beyond.

Is China a risk or an opportunity for Nvidia?

Over the next five years, China may have an outsized impact on Nvidia's business. However, it is still unclear whether the Asian nation will be more of a threat or an opportunity. On the surface level, Nvidia's pick-and-shovel business model protects it from much of this uncertainty.

The bull thesis is simple: Nvidia can sell chips to anyone. Even if Chinese AI companies outcompete their U.S. rivals on consumer-facing software, they will still rely on Nvidia's hardware to run and train their algorithms. But when we dig a little deeper, the situation isn't so clear-cut.

The market reacted negatively to the launch of DeepSeek's R1 model in January (causing Nvidia stock to drop more than 17% in a day). Even though the low-cost Chinese large language model (LLM) used Nvidia's H20 chips, it demonstrated that companies may not actually need to use Nvidia's most cutting-edge hardware (such as Blackwell GPUs) to keep up in the industry. It also highlighted the risk of potential AI intellectual property theft through a process called distillation, which involves using knowledge from an existing AI model to train a new one.

DeepSeek (and other Chinese rivals) have demonstrated that the economic moat of American AI companies is much shallower than previously thought. And if Nvidia's top customers are unable to make the profits they expect from their AI investments, they may be less willing to shell out billions on Nvidia's expensive hardware.

Nvidia isn't giving up on China

Over the coming years, China could become a big problem for Nvidia's American clients. But that isn't stopping the chipmaker from trying to service the crucial market, which represents 13% of its $130.5 billion in annual revenue. But that goal will be more easily set than achieved.

Image source: Getty Images.

On April 6, the Trump administration banned Nvidia from exporting its H20 chips to China, causing a $5.5 billion impairment charge because of canceled purchase agreements and inventory. This move follows a Biden-era ban on its H800 chips specifically designed for this market. Each time a chip is banned, Nvidia loses the ability to recoup the capital used to create it and potentially cedes market share and consumer trust to rivals.

Nevertheless, Nvidia isn't giving up. According to CEO Jensen Huang, the Chinese AI market will likely reach $50 billion in the next two to three years, and missing out on it would be a "tremendous loss." According to The Information, the company has already begun developing a China-tailored chip that will comply with the new export controls.

Caught between a rock and a hard place

Over the next five years, Nvidia may find itself caught between a rock and a hard place. If the company decides to keep making chips for China, it risks incurring more massive impairment charges if the government restricts its exports again. Furthermore, less powerful chips mean it will have to compete at a disadvantage compared to domestic rivals like Huawei, which are eyeing its market share.

Meanwhile, by doing business in China, Nvidia could set the stage for low-cost Chinese AI to eventually outcompete its big-spending American customers. Investors may want to wait for some of this uncertainty to clear up before considering a long-term position in the stock.